Is it Safe to Rely on Short-Term Loans When You’re Strapped for Cash?

short-term loans

When you’re living paycheck-to-paycheck, emergency expenses can send you into a state of panic. Easy access to money when you need it is typically what an emergency fund is for. But if you aren’t in a position to save, you likely don’t have cash to fall back on during those unexpected times. So what do you do?

This is where short-term loans (commonly called short-term cash loans or payday loans) may come in handy. It seems like a perfect solution: a loan you can get approved for within hours with cash transferred to your account immediately. But with any type of debt comes a list of serious things to consider.

So should you rely on short-term loans when strapped for cash?

The answer: only if you are out of options.

What are short-term loans?

Short-term loans typically require repayment within 90 days. Sometimes it’s by your next payday (hence the common term “payday loan”). Since these types of loans have to be paid back so quickly, they’re usually only given in small amounts

Once applied for, the loan terms are reviewed and either approved or denied within hours. Then the money is deposited directly into your bank account.

Pros of short-term payday loans

Short-term cash and payday loans can provide financial flexibility to people who live paycheck-to-paycheck. Since the funds are deposited to your bank account, you have instant access and can use the money any way you want.

Another benefit to short-term loans is their flexibility. There are now more online lending options that allow you to apply at any time day or night. Because so many online lenders are now available, there’s no need to go to a bank or loan office during business hours.

Plus, as you repay your loan and build up a reliable history with your lender, you are more likely receive higher loan amounts in the future. While you wouldn’t want to rely on this type of financial service too often, it could be useful to know that you have emergency cash available if you ever need it.

Cons of short-term cash loans

Let’s talk about the number one reason you shouldn’t use a short-term loan: it’s the most expensive type of debt you can carry.  And yes, it can be even more expensive than carrying a balance on your credit cards.

Interest rates on short-term loans are often much, much higher than the typical loan offered by a bank or private lender: upwards of 400% APR. That’s $15-$30 for every $100 you borrow.

You can also be hit with hefty charges if you don’t repay the loan on time. Since you are expected to pay off the loan within a short time frame, you should only consider a short-term loan if you are 100 percent confident in your ability to pay it back by your next paycheck and have no other cash advance options.

And, like any loan, be prepared to have your credit checked. Your credit will also be affected if you are unable to make payments.

Bottom line: short-term loans can be dangerous and are generally considered predatory financial products. After all, there’s a reason Google recently decided to ban payday loan ads. As Google reps reported, “Research has shown that these loans can result in unaffordable payment and high default rates for users.”

Normally, it’s the people who don’t have access to credit or savings accounts that use this type of loan. If they don’t have good credit or savings, they’re unlikely to have the kind of income and/or financial skills necessary to pay back the loan in full and on time. Thus, a cycle of expensive debt occurs, keeping borrowers forever indebted and unable to get on solid financial footing.

Should you take out a short-term loan?

If you have good credit, know that you will have the funds needed to repay your loan as quickly as possible, and aren’t worried about high interest rates, you could be a good candidate for a short-term loan. Again, because of the expense involved in taking out a short-term payday loan, it’s really only a last-resort option.

Instead, consider a personal loan for major expenses if you don’t have access to emergency savings or a credit card. The best personal loans charge lower interest rates, fewer fees, and offer a longer repayment period so you’re not caught in a cycle of borrowing.

Short-term cash loans can be a slippery slope. High interest rates and fees can make a financial emergency into a much larger debt problem that can be hard to escape if you aren’t careful. Avoid them at all costs and educate yourself about the alternatives to short-term loans.

Interested in a personal loan?

Here are the top personal loan lenders of 2017!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

2 Important Disclosures for Citizens Bank.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.19% APR to 11.32% APR (with AutoPay). SoFi rate ranges are current as of July 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.99% APR assumes current 1-month LIBOR rate of 1.22% plus 3.95% margin minus 0.25% autopay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.19% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$5,000 - $50,000Visit LendingClub
5.25% - 12.99%$2,000 - $50,000Visit Earnest
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